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Construction law in UAE a distinct body

UAE is undergoing an urban transformation unparalleled in the world. Fuelled by oil, visionary leadership and an entrepreneurial trading community, there has never been a more rapid construction witnessed. In view of the ever-changing landscape of construction activities, it is natural that various players choose to enter into contractual relationships defining, in extenso, both rights and obligations, like those between employer and contractor, employer and engineer, or between employer and quantity surveyors. Construction law in the UAE should, therefore, not only be considered as a distinct body of law but should also be treated as such both by the lawmakers and the judiciary, who play a pivotal role in shaping the future of this relatively young industry.

Currently, there is a lacunae in the law since only twenty-four articles of the UAE’s Civil Transactions Law [1] (hereinafter ‘the Civil Code’) which covers construction contracts under the broad head of civil transactions, apply to the construction industry. In order to remedy situations that are not contemplated by the aforesaid articles, the general theory of contracting is relied upon by the judiciary. These general provisions of the law are provided in various decrees, ministerial decisions and the Civil Code. [2] Due to the uniqueness of the construction contracts, such general provisions are inadequate in dealing with specialized contracts involving various players in the construction industry. [3]

I will now examine the adequacy of the present laws and the need for an act that governs construction contracts exclusively. Brief comparisons with similar laws in the United Kingdom will punctuate the discussion below.

STUDIES:

The UAE legal system is based on civil law and as a result, the primary source of law is statutory in nature. Additionally, the sources derived from the Egyptian legal system and French and Roman law have contributed to the development of the UAE legal system. UAE civil and commercial codes have also incorporated Islamic law as codified in the shari’a. [4] Due to a weak system of judicial precedent in civil law systems, a comprehensive law governing the construction industry is absolutely essential in the UAE as compared to a common law jurisdiction like the UK where the doctrine of stare decisis allows for the growth of a strong body of jurisprudence. [5]

Articles 872 to 896 of the Civil Code are the basis on which the construction contracts are currently regulated in the UAE. These contracts are known as Muqawala, which is a contract to make a thing or to perform a task as defined in Art. 872 of the Civil Code [6] . However, Muqawala contracts do not exclusively cover construction contracts as we can see from the definition. They apply generally to any contract for services, like a carpenter being contracted to complete a job or an artist assigned to a painting job.

At a more specific level, Chapter Three of the Civil Code attempts to enumerate, inter alia, the obligations of the parties, the conditions for subcontracting, and the termination of Muqawala contracts. However, as will be shown below, these provisions have proved unsatisfactory in dealing with the novel problems arising out of construction contracts.

Penalty clauses are an intrinsic part of construction contracts and most disputes are related to this particular clause. Article 390(2) [7] of the Civil Code, which empowers the judge to vary the penalty defined by the parties to the contract, has created confusion in an otherwise clear-cut area of rights and obligations. Such discretion to vary a pre-defined contractual obligation will leave the affected party unsatisfied with the outcome of his case even though the delay penalty had been quantified clearly in the contract. An analysis of a Dubai Court of Cassation judgment [8] is useful in examining the shortcomings of the provisions relating to penalties.

In a case before the UAE Court of Cassation [9] , the plaintiff invoked the penalty clause, claiming Dhs. 70,000 due to the Defendant’s delay in completing the contracted work within the time stipulated. The judge held that in case the Defendant does not accept liability or seeks reduction of damages, it is the burden of the defendant to prove that no damages have occurred or that damages suffered were not to the extent of the Plaintiff’s claim. The Court underlined the general power to vary damages agreed to between parties in the interest of equity.

With regard to the ten percent maximum damage penalty rule, the Court held that it will be improper to impose such a limit in cases where there is no agreement between the parties for such limits in the contract.

If a similar case, of similar facts, is being heard in the same jurisdiction by a different judge, the outcome may be totally contradictory due to the lack of a system of judicial precedent in the UAE legal system. It can also be seen that Articles 872-896 covering Muqawala contracts do not provide for delay penalties and hence the judge has to rely on the general law of contract provided in the code, which does not specifically apply to construction contracts. It is seen therefore that Article 390(2) applies indiscriminately to both construction contracts and contracts for sale of goods, disregarding the complex nature of the former.

The articles of UAE’s Federal Law applicable to subcontracting under Muqawala contracts, which are Article 890 [10] and Article 891 [11] , are inadequate to regulate the relationship between the main contractor, sub-contractor and the employer. The rules of subcontracting have not been fully defined. One of the main shortfalls in subcontracting can be observed in case of a nominated specialist contractor being appointed by the employer. Nomination weakens the contractual responsibility of the contractor towards the employer in case of default. If the contractor fails in his obligations to the specialist, the employer cannot be held liable. Also, in case the specialist defaults in his obligations to the contractor, the employer is not liable. [12] The contradictory nature of this issue can be observed by comparing the following two judgments. In a case where a specialist had defaulted through delays, a judge in the UK held that the contractor cannot sue the specialist. [13] On the contrary, in a case where a nominated sub-contractor approached the courts suing the employer since the contractor was insolvent, it was decided by the court that there was no liability on the employer since the order was placed by the contractor on the specialist. [14]

The above referred cases forced the construction industry in the UK to review the contracts, [15] due to the system of binding precedents, whereas in the UAE, enforcement has to be brought about through the laws. This is a complex issue in subcontracting due to the very nature of the relationship between the employer, contractor and subcontractor and needs to be addressed more thoroughly than what has been provided for in Articles 890 and 891.

Regarding insurance of works and professional indemnity insurances, UAE law has not adequately addressed the nuanced issues involved, leaving the parties to such contracts without the any guidance. Articles 1026 to 1055 of the Civil Code are the provisions for contracts of insurance generally and do not address the complex subject of insurance requirements bespoke to the construction industry. A classic example is the professional indemnity clause. As per Article 880(1) [16] of the Civil Code, the contractor and the architect are either jointly or severally liable for a period of ten years to ensure the stability and safety of the building is assured. First, this provision does not outline any measures to enforce liability in case of insolvency of either party. Only through an instrument like insurance can the law be enforced adequately in case the responsible party becomes bankrupt or insolvent.

Secondly, in case of any eventuality resulting in structural failure, the liability of the engineer and the liability of the contractor towards the employer are not clearly quantified. Comparatively, in the construction industry in the UK, there is a debate as to the inclusion of a net contribution clause in a contract. This would ensure that in case any one of the professionals involved becomes insolvent or is uninsured, then the burden of the liability does not fall entirely on the professional who is solvent or insured. Further, the employer should ensure the solvency of the main contractor or the subcontractors. [17] In the UK, courts have held that such clauses do not actually restrict liability but only make the negligent professional responsible for his or her damage. [18]

In the UK, architects follow the code of ethics as stipulated by the Architects Registration Board (ARB), which regulates their practice. One of the conditions for practicing architects is a mandatory requirement of professional indemnity insurance. [19] On the other hand, this practice by a responsible regulatory authority is non-existent in the UAE.

This is indicative of the seriousness with which the issue of insurance in the construction industry is regarded in other jurisdictions. It is submitted that a similar level of importance should be given to professional indemnity insurance in the UAE through the formulation of laws that will define the differing levels of liability of the parties entering into a construction contract.

Article 886(1) [20] of the Civil Code which addresses issues regarding variations in the agreed quantities and the claims resulting out of such variations, is poorly worded and does not encompass all types of variations. If there is a cost escalation due to uncertain and unexpected market conditions, the contractor has no recourse through legal means to vary the originally agreed price. Further, the time period within which the contractor should notify the employer in case of quantities substantially exceeding the itemized list is not specified, and merely calls out for an immediate notification. The perception of immediacy may vary between the contractor and employer, thus resulting in avoidable disputes.

The referred article proceeds further to state that the contractor loses his right for any future claims to such variations in case of lapse on his part to notify the employer ‘immediately’. This is contradictory to Article 318 [21] of the Civil Code, which does not permit the employer to be unjustly enriched due to a breach of contract by the contractor. The problem is compounded by the weakly worded Article 886(1) that does not define immediacy in notification as well as the ambiguity in its interpretation.

Article 886(2) [22] of the Civil Code provides for the employer to terminate the contract in case of a “substantial" increase in the price originally agreed due to variations. This leads again to the question of defining what a “substantial" increase is. The employer may think that ten percent increase in the original price is substantial, whereas the contractor may be of the opinion that anything beyond twenty-five percent of the originally agreed price is substantial. Further, the article provides that the employer may withdraw from the contract without delay, without observing any termination procedures. Comparing this to Clause 15.5 of FIDIC [23] , which is an internationally accepted standard form of contract in the construction industry adopted in many countries including the UK, the notice period to be given by the employer to the contractor in case of termination is spelled out clearly. Hence this leaves no ambiguity as to the procedures to be followed by both parties post termination.

Conclusion:

Due to the constraints in space, I have chosen to restrict the scope of this essay to only a couple of the substantive issues in the field of construction law in the UAE, namely insurance, penalties, subcontracting and termination of contracts.

The shortfall in the laws with respect to construction in the UAE is evident and needs to be reviewed. The system of arbitration and dispute resolution should be encouraged where parties to a dispute can seek remedies without resorting to an unnecessary and time-consuming litigation process. The decision of the arbitrator should be made final and binding upon parties to the dispute through relevant laws. Considering the nature of the legal structure in UAE and absence of a system of judicial precedent, it is particularly important to formulate laws catering exclusively to the needs of the construction industry. The much-needed security to investors in the construction field should be provided through carefully drafted statutory provisions.

Hence, I wish to conclude that the UAE’s construction laws in its present form cannot be considered as a distinct body that satisfactorily addresses the complex nature of issues in construction law.

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